Fri, Mar 13, 2015 - Page 15 News List

S Korea cuts rates as growth falters

SURPRISE MOVE:The Bank of Korea said that the cut is aimed at preventing the weak momentum seen in the first two months of the nation’s economy from limiting growth

Reuters, SEOUL

South Korea’s central bank yesterday cut interest rates for the first time in five months in a surprise move, joining the ranks of other economies which have recently taken advantage of lower inflation to ease monetary policy to spur sluggish growth.

The Bank of Korea’s (BOK) monetary policy committee, grappling with a weaker-than-expected economic recovery, lowered its base rate by 25 basis points to a record low of 1.75 percent, confounding expectations that it would wait at least another month to see if domestic and export demand improved.

The committee split in a five-two vote, BOK Governor Lee Ju-yeol said, without elaborating on the arguments of the dissenters.

A snap poll conducted by Reuters soon after the decision showed most analysts do not predict another rate cut this year.

“It [the rate cut] came one month earlier than we had expected,” JPMorgan Chase & Co Seoul-based economist Lim Ji-won said. “An additional cut still remains a possibility if the growth situation does not improve much from here, but at this point it really depends on the data.”

Lee said the cut — the first since October last year and the sixth since the BOK’s easing cycle started in July 2012 — was a pre-emptive move to keep the weak momentum seen in the first two months of the year from hurting the economy’s growth potential.

“We saw that the economy was not growing as much as thought and that inflation would be lower than expected,” Lee said. “We decided it would be better to act pre-emptively as we confirmed the risks were there.”

However, Lee was cautious about further rate moves.

“The Bank of Korea is making preparations based on the scenario that the [US] Federal Reserve will start raising rates in the second half of the year. However, we don’t feel that we will have to hike rates right away when the US begins tightening,” Lee said.

The surprise interest rate cut helped lift MSCI inc’s broadest index of Asia-Pacific shares outside Japan away from the previous session’s seven-week trough, while the euro plumbed a new 12-year low as the European Central Bank’s easing pressured eurozone bond yields.

South Korea’s KOSPI initially rose, but then fell 0.52 percent to close at 1,970.59. Japan’s Nikkei ended up 1.43 percent at a 15-year closing high, Australia’s S&P/ASX 200 Index added 0.98 percent, while Hong Kong’s Hang Seng Index gained 0.53 percent.

Bond futures initially rose and the won fell to a 20-month low after the decision, but bonds later returned to previous levels and the won recouped losses as traders took profits from the US dollar’s recent rally after the central bank’s move.

Lee said foreign exchange rates were important to South Korean exporters but disagreed with some analysts’ view that the current global easing trend was aimed primarily at depressing exchange rates. Rather, he said, the policy changes were sparked by economic problems in their respective nations.

The Bank of Thailand also cut its policy interest rate on Wednesday in a surprise move. India has cut rates twice already so far this year and China has also eased policy twice, with more moves expected. Singapore, Australia and Indonesia have also eased.

Meanwhile, New Zealand’s central bank yesterday held interest rates at 3.5 percent, saying lower oil prices were helping to contain inflation.

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